Markets as Economizers of Information: Field Experimental Examination of the 'Hayek Hypothesis'

Abstract

The work of Friedrich Von Hayek contains several testable predictions about the nature of market processes. Vernon Smith termed the most important one the 'Hayek Hypothesis': equilibrium prices and the gains from trade can be achieved in the presence of diffuse, decentralized information, and in the absence of price-taking behavior and central market direction. Vernon Smith tested this by surveying data on laboratory experimental markets and found strong support. We repeat this exercise using field experimental data. Using field experiments allows us to test several other predictions. Generally speaking, we find support for Hayek's theories.

Keywords: Price Dynamics, Entrepreneurs, Field Experiment, Market Process

JEL Classification: B53, C90, D40, D51, D61, D82, L26